Tax Bill Seeks to Improve Australia’s Thin Capitalization Regime

Tax Bill Seeks to Improve Australia’s Thin Capitalization Regime

The Australian Treasury has published for comments a draft tax Bill that would implement two key changes to improve the country’s thin capitalization regime. The changes – first proposed in the 2018-19 Budget – are intended to apply from income years beginning on July 1, 2019.

The Australian thin capitalization rules require an entity to comply with the accounting standards in determining and calculating the value of its assets, liabilities, and equity capital. Currently, an entity can depart from this value to value its assets at a value different to that used in the entity’s financial statements; recognize internally generated intangible assets that are not recognized under the accounting standards; and revalue intangible assets that do not have an active market.

The draft Bill – published on August 1 – would tighten the thin capitalization rules by requiring an entity to use the value of the assets and liabilities that are used in its financial statements; and by removing the ability for an entity to revalue its assets specifically for thin capitalization purposes.

Additionally, non-authorized deposit-taking institution (ADI) foreign-controlled Australian tax consolidated groups and multiple-entry consolidated groups that have foreign investments or operations would be treated as both outward investing and inward investing entities (currently these are treated as outward investing entities).

“Recently, there has been a significant increase in the use of asset revaluations by taxpayers to generate additional debt capacity under the safe harbor debt amount. This enables these taxpayers to claim greater debt deductions. Concerns have been raised about the rigor and accuracy of some of these asset revaluations,” the Explanatory Memorandum notes.

Scott Morrison, Australian Treasurer, said that the measure “is designed to improve the integrity of the thin capitalization rules.”

“The draft legislation requires entities to align the value of their assets for thin capitalization purposes with the value of their assets in their financial statements. This will further reinforce the Government’s commitment to the integrity of Australia’s tax system and ensure multinationals pay their fair share of tax,” Morrison said.

A transitional rule would allow an entity to rely on revaluations of assets supported by the entity’s most recent valuation made prior to the time of announcement of the measure on May 8, 2018. These revaluations can be used until the last day before the start of the income year commencing on July 1, 2019.

Comments on the draft Bill must be received by August 17.